James River Ins. Co. v. Thompson

CourtUnited States District Courts. 9th Circuit. United States District Courts. 9th Circuit. District of Arizona
PartiesJames River Insurance Company, Plaintiff/Counterdefendant, v. Wendee Thompson, et. al, Defendants/Counterclaimants
Docket NumberNo. CV-20-01052-PHX-DGC,CV-20-01052-PHX-DGC
Decision Date07 May 2021

James River Insurance Company, Plaintiff/Counterdefendant,
v.
Wendee Thompson, et.
al, Defendants/Counterclaimants

No. CV-20-01052-PHX-DGC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

May 7, 2021


ORDER

Plaintiff James River Insurance Company has filed a second motion for leave to amend its complaint and for reconsideration of the Court's order staying this case. Doc. 38. The motion is fully briefed. Docs. 46, 52. Defendants' request oral argument is denied because it will not aid the Court's decision. See Fed. R. Civ. P. 78(b); LRCiv 7.2(f). For reasons stated below, the Court will grant the motion.

I. Background.

Plaintiff issued a medical professional insurance policy to Dr. Phillip Gear and Just for Kids, P.L.C. Wendee Thompson and her parents, Joseph and Mildred, sued Dr. Gear and Just for Kids in state court, asserting medical malpractice claims based on Dr. Gear's alleged failure to discover and prevent Wendee's sexual abuse at a long-term care facility and her resulting pregnancy. See Thompson v. Gear, No. CV2019-057584 (Maricopa Cty. Super. Ct. Dec. 24, 2019); http://www.superiorcourt.maricopa.gov/docket/CivilCourtCases/caseInfo.asp?caseNumber=CV2019-057584 (last visited April 23, 2021).

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Pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201(a), Plaintiff brought this federal action against Dr. Gear and Just for Kids to establish that there is no coverage for the Thompsons' state court tort claims. Doc. 1. The Court allowed the Thompsons to intervene as Defendants after they had dismissed Just for Kids from the state court case and Dr. Gear had assigned to the Thompsons his rights under the policy pursuant to a Morris agreement. Docs. 15, 17, 24.1 Defendants filed an answer and counterclaims for declaratory relief, breach of contract, and bad faith. Doc. 26.

In November 2020, the Court granted Defendants' motion to stay this action in favor of resolving all issues in state court, finding that a stay was warranted under both the Brillhart and Colorado River doctrines. Docs. 27, 35; see Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494-95 (1942); Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 814-17 (1976). Defendants' breach of contract and bad faith claims were dismissed without prejudice, to be litigated in state court. Docs. 34 at 3, 35 at 3.

In December 2020, Plaintiff sought leave to amend its complaint and assert a rescission claim, asserting that newly discovered evidence shows Dr. Gear made a fraudulent misrepresentation on his 2018 renewal application. Doc. 38 at 2-7.2 Plaintiff stated that in November 2020 it obtained what appears to be an entry written by Dr. Gear in the Transverse Myelitis Association Journal in January 2011. Doc. 38 at 4 (citing Doc. 38-4). Dr. Gear described his November 2002 diagnosis with transverse myelitis and his ongoing symptoms. Doc. 38-4 at 1-2.3

Plaintiff claimed that Dr. Gear failed to disclose this chronic illness on the 2018 insurance application. Doc. 38 at 7. Specifically, Plaintiff alleged that Dr. Gear answered "no" to question number 12 of the application, which, according to Plaintiff, asked whether

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he had been diagnosed with or treated for a "chronic physical illness." Doc. 38-1 ¶¶ 25-27. But question 12 actually asked whether Dr. Gear had been diagnosed with or treated for a "chronic physician illness." Doc. 38-2 at 3 (emphasis added).

The Court found that the amended complaint failed to state a plausible fraudulent misrepresentation on the part of Dr. Gear because he clearly did not misrepresent that he had no "physical" illness as the proposed claim alleged - that question was not asked in the application. Doc. 42 at 3. Because Plaintiff made no allegation that Dr. Gear failed to disclose a "physician" illness, what such an illness might be, or why it was material, the Court denied leave to amend as futile. Id. at 3-4. Given the denial, Plaintiff's request for reconsideration of the stay order was denied as moot. Id. at 4; see Doc. 38 at 7-8.

Plaintiff now seeks leave to amend "to correct the reference to the application question and the wording including 'chronic physician illness.'" Doc. 43 at 7. Plaintiff asserts that "[t]he plain and ordinary meaning of 'chronic physician illness' is a chronic illness that a physician has[,]" and that Dr. Gear was a physician who failed to disclose his chronic transverse myelitis on the 2018 application. Id. at 6. Plaintiff argues that leave to amend should be granted under Rule 15's liberal amendment policy, and that the stay order should be vacated because the rescission claim takes this case outside the Brillhart abstention doctrine and Colorado River does not support a stay. Id. at 5-10.

II. Leave to Amend.

Rule 15 provides that the Court "should freely give leave [to amend] when justice so requires." Fed. R. Civ. P. 15(a)(2). The liberal amendment policy must not only be heeded, Foman v. Davis, 371 U.S. 178, 182 (1962), it must be applied with "extreme liberality," Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001). The Court may deny a motion to amend where there is undue delay or bad faith on the part of the amending party, undue prejudice to the opposing party, or futility of the proposed amendment. Foman, 371 U.S. at 182.

As the parties opposing amendment, Defendants "bear[] the burden of establishing futility or one of the other permissible reasons for denying a motion to amend." World

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Nutrition Inc. v. Advanced Enzymes USA, No. CV-19-00265-PHX-GMS, 2021 WL 632684, at *1 (D. Ariz. Feb. 18, 2021); see DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 187 (9th Cir. 1987). Defendants contend that leave to amend should be denied on each of the four grounds articulated in Foman. Doc. 46 at 7.

A. Futility.

The standard for assessing whether a proposed amendment is futile is the same as the standard for motions to dismiss under Rule 12(b)(6), "although 'viewed through the lens of the requirement that courts freely give leave to amend when justice so requires.'" SCI Collaboration, LLC v. Sports Car Int'l, LLC, No. 3:20-CV-170-AC, 2020 WL 6531912, at *5 (D. Or. Nov. 5, 2020) (citations omitted). Under Rule 12(b)(6), the well-pled factual allegations of the complaint are taken as true and construed in the light most favorable to the plaintiff. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). A complaint that sets forth a cognizable legal theory will survive a motion to dismiss if it contains "sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).4

Arizona law allows an insurer to rescind a policy because of a misrepresentation in the application where "(1) the misrepresentation is fraudulent, (2) the misrepresentation is material either to the acceptance of the risk, or to the hazard assumed by the insurer, and (3) the 'insurer in good faith would not have issued the policy if the true facts had been made known to the insurer as required either by the application for the policy or otherwise.'" James River Ins. v. Hebert Schenk, P.C., 523 F.3d 915, 920-21 (9th Cir. 2008) (quoting A.R.S. § 20-1009; ellipses omitted); see also Loza v. Am. Heritage Life Ins., 434

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F. App'x 687, 689 (9th Cir. 2011); Principal Life Ins. Co. v. Zaki, No. CV-15-1337-PHX-SMM, 2018 WL 10811261, at *4 (D. Ariz. Mar. 7, 2018).

Plaintiff alleges in the proposed amended complaint that Dr. Gear was diagnosed with transverse myelitis in 2002, that transverse myelitis is a chronic illness, and that Dr. Gear had been treated continuously for the illness since his diagnosis. Doc. 43-1 ¶¶ 2, 7-9. Plaintiff further alleges that Dr. Gear fraudulently misrepresented that he had not been treated for a chronic physician illness in the 2018 application, that this misrepresentation was material to Plaintiff's acceptance of the risk or to the hazard it assumed, and that Plaintiff in good faith would not have issued the policy if the true facts were known. Id. ¶¶ 64-67. Accepting these allegations as true and drawing all reasonable inferences in Plaintiff's favor, see Cousins, 568 F.3d at 1067, the Court finds that the proposed amendment pleads a rescission claim that is plausible on its face. See A.R.S. § 20-1009; Iqbal, 556 U.S. at 678.

Defendants make several arguments as to why the rescission claim is futile. Doc. 46 at 7-14. None has merit.

1. Ambiguity.

Defendants argue that the phrase "chronic physician illness" in question 12 is "wildly ambiguous" and therefore "cannot be relied upon as the basis for a rescission claim." Doc. 46 at 12 (citing Loza, 434 F. App'x at 689-90 ("We hold that AHL was not entitled to rescission because the term 'diagnostic test for cancer' is ambiguous[.]"); James River, 523 F.3d at 921-22 (finding no fraud because the application question was ambiguous and reasonable persons could conclude that the question elicited an opinion)). But in determining whether a proposed claim is futile for purposes of leave to amend, "[a]ll ambiguities or doubts must . . . be resolved in the plaintiff's favor." Gifford v. Kampa, No. 2:17-CV-2421-TLN-DMC, 2021 WL 1143507, at *7 (E.D. Cal. Mar. 25, 2021) (citing Jenkins v. McKeithen, 395 U.S. 411, 421 (1969)); see Hearn v. R.J. Reynolds Tobacco Co., 279 F. Supp. 2d 1096, 1102 (D. Ariz. 2003) (the court "must resolve any ambiguities in the considered documents in the plaintiff's favor" in ruling on a Rule 12(b)(6) motion);

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Rajasundaram v. Maricopa Cty. Cmty. Coll. Dist., No. CV-20-01544-PHX-SPL, 2021 WL 1117324, at *2 (D. Ariz. Mar. 24, 2021) (the court "will take the terms of the [policies] as true and resolve any ambiguities in favor of [p]laintiff" in deciding the motion to dismiss). To the extent the phrase "chronic physician illness" is ambiguous, as Defendants assert, the Court must accept Plaintiff's interpretation of the...

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